Nokia/Alcatel: party line

Telecom executives like jargon even more than their peers in other industries. "Convergence" - bringing together fixed line and wireless assets - is a special favourite. But convergence, in a plainer sense, is exactly what critics find lacking in the €16bn Nokia - Alcatel-Lucent deal.

The deal merges two mergers, the nightmarish Alcatel-Lucent tie up and the merely awkward Nokia Siemens marriage. Will the heads of the resulting Finnish-German-French-American hydra bite each other, rather than competitors Huawei or Ericsson?

Both companies have plenty of practice with restructuring. That may help over time. Meanwhile, the structure of the deal, and the timing, will provide support.

The fact that the deal was done all in shares and at a low premium was likely disappointing to Alcatel shareholders (those shares fell a little on Wednesday). But as a result the new company will have over €7bn in net cash to invest or to mollify investors, and scope for achieving an investment grade credit rating (a cynic might wonder if Nokia was worried that Alcatel, in the final year of its restructuring program, is still burning cash; according to UBS, Alcatel is still cutting costs, but that process is getting harder).

The promise of €900m in annual cost savings from 2019 is not bold, at less than a tenth of operating costs. Better to under-promise, though. And geography may be as important as savings. In telecoms equipment, by far the most profitable market is the US, where the flinty Chinese do not play. If Nokia can sell more of its products in the US using Alcatel-Lucent's strong base there, that will widen margins.

The Nokia Siemens and Alcatel-Lucent mergers were congealing when the deflationary pressure applied by the emergent Huawei was at its worst. The pressure is lighter now, and the move from four to three players should lighten it further. Where convergence is missing, timing will have to serve.

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